“Value investing…as in, buy something when “all is quiet”. When the stock just drifts along…when no one seems to like it…when the company is trying to keep things quiet and insiders are accumulating…when the silence is designed to shake you out of your position.
I am learning…you don’t just throw money at an idea whatever the price. You also pay attention to the cycle of silence (accumulation), markup, and promotion. Some stocks scream accumulation when there is an almost unnatural silence for a long time, and unbelievably low volumes.
Why buy a stock when it’s expensive and noisy when you can get it cheap and quiet?”
– Mike Burry
“A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”
– Wayne Gretzky
Sandstorm Metals & Energy (SND) is an obscure, underappreciated, micro-cap franchise with a highly skewed, incredibly favorable risk/reward equation.
An investment in Sandstorm Metals and Energy at or around the current price possesses nearly all the qualities we look for in a great long-term investment. In particular (1) an unsustainably low valuation (both absolute and relative to peers) (2) a good, fully incentivized management team (3) near to medium-term operating momentum (4) a highly attractive long-term business model and (5) multiple internal and external high probability catalysts (which we expect will drive substantial near to medium-term upside)
Other attractive attributes of Sandstorm M&E include…
- A dominant competitive position in a rapidly growing niche market
- An unlevered balance sheet
- Improving economics on an attractive and fast growing asset base
- Zero tax liability given Bermuda domicile
- A high likelihood of experiencing meaningful improvements in near term profitability and cash flow
- Opportunity to invest capital at (1) a very high rate and (2) for a very long time
- A natural inflation hedge/low risk way to participate in minerals/commodity bull market
Why its Mispriced?
As an illiquid, Canadian micro-cap spinoff with a practically non-existent operating history and financials that offer a limited view of SND’s future earnings power – as to date they’ve shown the cost of acquiring 9 M&E streams but very limited revenue and cash flow given the natural lag between the initial investment and production – it’s not necessarily shocking that SND is mis-priced, nor that the majority of intelligent investors at this point are completely unaware the companies existence.
A Low-Risk High-Return Investment Opportunity:
What is a little shocking in my mind though is the magnitude of the mis-pricing and the opportunity to earn many multiples of your money over the next 3-5 years with practically no chance of permanent loss.
Rarely do I come across an opportunity to purchase a fast growing emerging franchise run by a visionary owner operator with an extraordinary record of value creation (and a better than average shot at being a 1B+ company in time) at a truly absurd ~4x normalized earnings and/or a conservative discount to its readily ascertainable liquidation value (defined here as a discount to the run-off value of SND’s senior secured, contractually guaranteed minimum cash flows.).
Not often (practically never actually) have I been so impressed by, and frankly fired up to partner with such a visionary and capable CEO over the course of my investing career. Sandstorm’s President and CEO Nolan Watson is truly something special. As a chartered accountant and CFA who went on to become the first employee and CFO of value creating juggernaut Silver Wheaton, Watson proceeded to invent the commodity stream business model and developed one of the most impressive track records I’ve ever come across as a professional investor (before the ripe old age of 30). I mean, were talking about a guy who at 26 became the youngest CFO in the NYSE’s history. Not bad.
A few additional interesting highlights on Watson include his love of value investing, and his graduation from Canada’s elite, University of British Colombia at only 19. Post graduation, Watson worked for Deloitte’s corporate finance department doing business valuation and M&A, until leaving in 2004 to start SLW under the guidance of industry legend Ian Telfer. He was named one of the CFA magazine’s “most motivated” in 2008 and has been awarded countless other awards and distinctions such as Valedictorian of the Institute of Chartered Accountants of British Colombia.
Notably, by the time Watson decided to leave in 2008 to build his own business in hopes of replicating Silver Wheaton’s success in other parts of the mining sector, he had raised over $1B in debt and equity, hit more than a few absolute grand slam streaming deals and been a key figure in SLW’s market cap growing from ~200m to over $3B over the course of his 4 year tenure. Not to shabby for four years of work no? As an aside, with Silver Wheaton’s current market cap at ~13B, the power of SND’s “mini SLW” business model should be readily apparent.
The key takeaway from all of this in my mind is that Nolan was an instrumental figure in building SLW into the company it is today and he appears well positioned to do it again, supported by an impressive board and a world class advisory/technical group and an open ended opportunity set. With an almost super-human work ethic and an unquenchable desire to truly build a business for the record books, I think we have all the ingredients here for substantial long-term success.
The following profiles and interviews should help paint the picture as far as sizing up the caliber of the extraordinary individual leading SND’s charge…
So with some basic familiarity with who this guy is, it’s comforting to know that Watson’s reputation, money, and career are all on the line here. Given that and the profiles/interview’s above, ya think he’s motivated to succeed? I’d say so.
So while success in life and business is never assured, I think its fair to say that this guy is one of the smartest, most intensely motivated leaders I’ve ever invested alongside and one would have to be border-line insane to bet against him (as SND’s price implies). Not to imply this guy doesn’t make mistakes (see the recent royal coal debacle), we all do and he certainly has – but all that said, he does seem to possess the passion, the magic if you will, that is the hallmark of all truly great business leaders and entrepeneurs. I read a VC article the other day that put it well – “what he does mixes with who he is, which is cooked and propelled by what he believes.”
It’s also worth noting that Watson’s on record saying that he believes SND will be a multi-billion dollar business and should ultimately become the biggest and best of his babies in time (fyi, he is also president and CEO of SND’s sister company Sandstorm Gold). I tend to agree to say the least. Perhaps more importantly, he’s on record saying how frankly stupid cheap SND is at or around today’s valuation and (unsurprisingly), has been actively adding to his already large stake in the open market.
Unique High Return Business Model
As the only pure play, publicly traded base metal and energy-streaming company of its kind, Sandstorm offers several benefits/unique characteristics to both investors of traditional mining companies and executives looking for optimal sources of financing. So, before we delve in to what makes this company so special, let quickly review how SND makes money.
Put simply, SND finances late stage junior miners with low cost operations and best in class management teams by buying future production of commodities at fixed prices. The typical price they pay is at or beneath that of the commodity in questions low cost producer. The producer gets needed financing to bring mines into production without massively diluting shareholders and SND in turn gets a percentage of their future production and usually a guaranteed principal repayment within 5 years (so far, all of their existing deals have this heads I win, tails I don’t lose provision).
Per Sandstorm’s website….
“Sandstorm Metals & Energy Ltd. is a growth focused resource based company that seeks to complete commodity purchase agreements with companies that have advanced stage development projects or operating mines. A commodity purchase agreement involves Sandstorm making an up-front cash payment to its partners and in exchange, Sandstorm receives the right to purchase a percentage of the commodity produced for the life of the asset, at a fixed price per unit. Sandstorm helps other companies in the resource industry grow their business, while acquiring attractive assets in the process.
Sandstorm is focused on low cost, profitable operations with excellent exploration potential and management teams focused on accretive growth in politically stable jurisdictions.”
For what its worth, I think the story is very much the same story as it was for SLW in 2004. We have an unknown, hugely underappreciated innovative business with fixed SG&A, network effects, significant operating leverage, minimal cap-ex, high ROIC, an effective tax shield, and no brainer multiple expansion once (1) the company is better known and (2) it reaches a level of scale where comparisons to the bigger royalty